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Once upon a time, not too long ago, I lived in an apartment complex that had serious problems. Unlike other apartment complexes, the problems that worried tenants weren't bed bugs or plumbing. It wasn't even the issue of unkempt carpeting in the hallway.
Rather, the problem that ended up causing so many complaints were the quality of the tenants. It wasn't unheard of to see an evicted tenant sleeping on the floor of the hallway, nor was it unheard of to hear physical fights in the building.
Police came by around once a week or so, and they were only called when things got bloody. The FBI came a couple of times, primarily due to the sheer number of drug dealers that lived in the building.
During my tenure at that apartment, we had weed smoke waft through the hallways on a daily basis. On the lower level of the two-story building, you could also smell the moldy-acrid odor crack being lit up by one of the unnamed tenants.
Admittedly, my apartment had become a party house of sorts and ended up causing a lot of noise complaints as well. At one point, a hole was even punched in my closet. However, I won't lie; I was pretty relieved when I finally left the building.
What's interesting about this apartment complex is that it was in a relatively good neighborhood. The average price of an apartment was $1400 for a studio. This building, though? They couldn't get anyone to pay more than $850 for a very large space.
These days, I'm wealthy enough to live in a better place. I've even started looking into real estate investing as a way to improve my income—and that's when I started to study the places I used to live.
My old apartment should have been a profitable building, but it just wasn't. Looking back, I realized it was the landlord's fault. He committed some seriously bad real estate investment mistakes with that building, and that caused it to be a nightmare to manage.
If you want to invest in real estate, this cautionary tale may seem outlandish to you. However, these mistakes are far more commonplace than you'd think. If you want to actually turn a profit, you need to make sure to avoid these major gaffes...
Investing Without Due Diligence
Without a doubt, one of the worst real estate investing mistakes you can make is diving into an investment without looking at what you're getting into. Due diligence is crucial when you are hoping to become wealthy off real estate.
There are a ton of different ways to invest in real estate ranging from being a landlord to investing in REITs. Each type of investment will have its own perks and pitfalls, as well as risks. You need to be aware of what you're getting into before you buy your first property.
Honestly, though, if you are new to real estate, you might be better off letting others do the landlording for you by just investing in a real estate trust or investing in peer-to-peer lending for real estate projects.
Buying a House Without a Plan
Scary as it is to think, there are people out there who have spent hundreds of thousands of dollars on an investment property, only to realize they have no idea what to do with it. Do they want to fix it and flip it? Rent it out? Sell it on wholesale?
If you don't know what you're doing with the house you're looking to buy, you're making one of the most dangerous real estate investment mistakes possible. Always look before you leap, and plan things out accordingly.
Not Budgeting for Unexpected Repairs
If you are looking to become a landlord, buy a turnkey property, or flip a house, you have your work cut out for you. This route of investment is far more hands-on than most people realize, and the fact is that most houses end up requiring repairs that aren't always forseen.
Even the most well-maintained property will eventually need a surprise repair, a call to the exterminator, or a quick upgrade. Tenants aren't going to be the ones responsible for those costs; you, as a landlord, will be.
Many newbie landlords price their rents low, thinking that it's just enough to make ends meet without taking into account the need for repairs. Should a major repair happen, you'll end up losing all the money you may have earned from your rent payment.
A good way to avoid this issue is to charge a little more rent than you think you'll need, then put the extra into an emergency fund.
Not Properly Insuring Your Property
Nobody likes having to pay into insurance, especially if disaster never seems to come. However, during those times when something terrible does happen to you, insurance becomes the lifesaver that allows you to avoid drowning in debt.
It only takes one seriously bad tenant, or one major weather disaster to lose everything you put into your property. Insurance is one of those things that can help you recover your costs when damage has been done to your property.
Landlords would be wise to insure their buildings and require renters to hold renters' insurance. Otherwise, you may end up losing more money than expected, or worse, be held liable for damages you never should have to deal with.
Being Unaware of Rental Laws
Understanding landlord laws, real estate laws, and tenants' rights in your state is a must if you intend on buying, renting, or selling your property. Being unaware of the laws that protect you is one of the easiest real estate investment mistakes to make—and sadly, ignorance really isn't bliss.
You need to make sure that all the terms of your rental contracts are ironclad and legally enforceable. Should a renter, realtor, or buyer take you to court, the contracts you sign can make or break your ability to keep your real estate company above water.
It's important to realize that vagueness isn't a good thing here. It's legal grey areas that tend to eat up the most time in court, and also tend to be the reasons why landlords lose in court.
If you're not sure whether your contracts are beneficial, consulting with a real estate lawyer is a good idea. It may cost more initially, but it could save you thousands later on.
Not Researching a Property You Want to Invest In
Part of the "look before you leap" aspect of investing is learning about your investment piece. When you're looking to buy an investment property, this means learning about the history of the home, the laws that could impact the home, as well as the condition of the home.
A good idea for any budding real estate investor would be to hire a home inspector to look through a home or building before they buy it. This will give you a good idea of what to expect if the building in question needs repairs—and how much money you could potentially spend on it if you do buy it.
One of the biggest real estate investment mistakes people make is to pay too much on a property. If you overpay, you may never actually make ends meet. Overpaying happens when you don't know the actual value of the home.
Assuming You'll Immediately Get Rich
Yes, reading books from Robert Kiyosaki could definitely give people the idea that buying up real estate is the fastest route to Easy Street—but it's not. Like any other form of investment, real estate requires a bit of time to become profitable. In most cases, it also will require a lot of effort, too.
Most new real estate investors tend to forget that investing in real estate has its risks, high costs, and problems. Even investing at a time when real estate becomes a bubble can cause you to lose money that might never actually be regained.
Having the "I'll get rich immediately" mentality is one of the most common real estate investment mistakes out there. Sadly, it's also one of the most toxic.
Assuming You Can Do It Alone
Real estate is a huge, complicated industry. Even the biggest real estate moguls don't know all the ins and outs of the industry—and if they do, they sure as heck aren't going from property to property to fix everything that breaks!
You will need people to manage your rental property in most cases. You also will need people to help you book a good real estate deal. A great real estate deal is one that is built on teamwork.
Trying to go it alone is a foolish mistake that will quickly lead you to financial ruin and burnout.
Underestimating Your Cash Flow
A lot of landlords, particularly new ones, tend to want to keep rents as low as possible. It's a nice thought; many people already struggle to make rent as is. If you can, by all means, you can do it and be the good guy of your neighborhood.
However, a lot of landlords tend to underestimate cash flow. Rent doesn't always cover the utilities you want to cover, the repairs that are needed, or the cost of maintenance. You need to keep an eye on utilities and the like, simply because you shouldn't be losing money during your investments.
Not Screening Your Contractors
Your real estate investments won't really work well if the buildings that you own are falling apart at the seams. We've all heard of contractors who either bailed midway through a project or did such a terrible job that it cost extra to repair the damage they did.
You do not want to have to deal with a contractor who makes your job as an investor harder. Screen them, and make a point of developing a relationship with the better ones you've worked with.
Not Screening Your Tenants
Finally, speaking as someone who's lived through it, I can tell you that refusing to screen your renters is one of the most dangerous real estate investment mistakes you can make.
There's a reason why so many landlords are so thorough when it comes to their tenant screening programs. The reason why is because creating a "bad neighborhood" in your building is an easy way to make your apartment complex and the surrounding areas lose value.
All the great amenities that you can offer in a home won't mean anything to potential renters if they're afraid to leave their rooms. In real bad cases, choosing the wrong tenant could lead to them destroying your building and causing thousands of dollars in damage.
In some really extreme cases, you could end up with a "tenant from hell" who refuses to pay rent, refuses to leave the property, and drags you through court. Though it's rare, having a tenant like this has happened and has cost landlords hundreds of thousands of dollars in court fees.
So, if you do anything at all, screen your tenants well. It might save your retirement.